March inflation numbers are in in Latvia: 8.5% y-o-y, with monthly numbers (1.4%) far exceeding expectations (0.5%). The Baltic Times put it, Macarena reckons, in rather straight-forward terms:
In Latvia, inflation soared 1.4 percent in March, a full percentage point above expectations. The result baffled economists, who had predicted 0.4 - 0.5 percent. On closer analysis, however, it became clear that the culprit was the lat, which had lost a portion of its value against the euro as more forex traders sold the Latvian currency in favor of euros. (see here).
In Estonia numbers were also higher than expected: 1% in March, 5.3% y-o-y.
Let the games continue!
23.4.07
Colomb-Economists and their odd Musings
Macarena finds the exchange rate debate in Colombia very entertaining.
An entire generation of otherwise reasonable people seems to have learned in grammar school that “productivity”, “export orientation” and “currency depreciation” are synonymous concepts.
Colomb-economists, as a very wicked friend of Macarena’s calls them, are quite a lovely bunch of mostly 40 and 50-something male oracles. They exhibit stern circumspection in arguing, in the local power point-intensive seminar circuit, that flexible exchange rates are a “good thing for the Country".
The problem is that ---whilst loving flexible exchange rates--- they hate exchange rate flexibility.
Or, at least, they despise any deviation of the real world rate, from where they would like to see the parity.
In thinking about deviations from their prior "estimates", colomb-economists come up with some very funny stuff… Hence Macarena’s delight whenever the peso moves around a bit, especially upwards.
In line with what has happened in many countries, the peso has strengthened in the last couple of years. In this 2-year perspective, appreciation vis-à-vis the U.S Dollar is roughly equal to that of Chile and Brazil, within the Latin American region, or Australia and Israel, outside the region. There has been a lot of volatility, true, but this probably has to do with Colombia’s much shallower and much more regulated derivative markets, rather than with anything profoundly macroeconomic.
Though there are many close competitors, Macarena’s most cherished colomb-economist model is the following.
Theorem 1: Exchange rate trends are explained by fiscal policy.
Nothing too surprising, right?. All reasonable models allow one to think that if fiscal policy becomes unsustainable, interest rates will increase, reflecting insolvency risks, people will want to substitute domestic assets for external assets, and so on. All of which will lead to currency depreciation, banking sector difficulties, run on reserves, and so on. The thirty year old first-generation BOP crisis model is a fixed exchange rate example of this: money-financed fiscal deficits cause a run on reserves, and so on. Easy enough to translate into the quasi flexible context of Colombia. Modern multiple-equilibrium models are not even necessary in this quite trivial fiscal insolvency scenario.
Theorem 2 (Macarena’s favorite): Any move towards fiscal insolvency appreciates the nominal exchange rate.
Now this is what Macarena calls a substantial contribution from Colomb-Economists to the world: If authorities want to strengthen their currencies, reduce interest rates, increase asset prices, and increase FDI and other capital flows TO the country, all they have to do is become fiscally insolvent, just as Colombia has –in their peculiar view— done in the last few years.
An entire generation of otherwise reasonable people seems to have learned in grammar school that “productivity”, “export orientation” and “currency depreciation” are synonymous concepts.
Colomb-economists, as a very wicked friend of Macarena’s calls them, are quite a lovely bunch of mostly 40 and 50-something male oracles. They exhibit stern circumspection in arguing, in the local power point-intensive seminar circuit, that flexible exchange rates are a “good thing for the Country".
The problem is that ---whilst loving flexible exchange rates--- they hate exchange rate flexibility.
Or, at least, they despise any deviation of the real world rate, from where they would like to see the parity.
In thinking about deviations from their prior "estimates", colomb-economists come up with some very funny stuff… Hence Macarena’s delight whenever the peso moves around a bit, especially upwards.
In line with what has happened in many countries, the peso has strengthened in the last couple of years. In this 2-year perspective, appreciation vis-à-vis the U.S Dollar is roughly equal to that of Chile and Brazil, within the Latin American region, or Australia and Israel, outside the region. There has been a lot of volatility, true, but this probably has to do with Colombia’s much shallower and much more regulated derivative markets, rather than with anything profoundly macroeconomic.
Though there are many close competitors, Macarena’s most cherished colomb-economist model is the following.
Theorem 1: Exchange rate trends are explained by fiscal policy.
Nothing too surprising, right?. All reasonable models allow one to think that if fiscal policy becomes unsustainable, interest rates will increase, reflecting insolvency risks, people will want to substitute domestic assets for external assets, and so on. All of which will lead to currency depreciation, banking sector difficulties, run on reserves, and so on. The thirty year old first-generation BOP crisis model is a fixed exchange rate example of this: money-financed fiscal deficits cause a run on reserves, and so on. Easy enough to translate into the quasi flexible context of Colombia. Modern multiple-equilibrium models are not even necessary in this quite trivial fiscal insolvency scenario.
Theorem 2 (Macarena’s favorite): Any move towards fiscal insolvency appreciates the nominal exchange rate.
Now this is what Macarena calls a substantial contribution from Colomb-Economists to the world: If authorities want to strengthen their currencies, reduce interest rates, increase asset prices, and increase FDI and other capital flows TO the country, all they have to do is become fiscally insolvent, just as Colombia has –in their peculiar view— done in the last few years.
Manly Money: British Dilemmas
Let me see if I get the British –Macarena told me late last night—.
Number one: inflation has been increasing and now exceeds the comfort limit of 3%, to the point that for the first time since the Old Lady was made independent, the Governor of the Bank of England had to write the dreaded, and legally mandated, “explanation letter” to the Chancellor.
Number two: the British Pound has appreciated beyond the US$2 mark for the first time since 1992, an event terrible, linked to the infamous Black Wednesday affair.
Number three: the conventional wisdom rationalizes this apparent paradox (accelerating inflation + currency appreciation) by invoking the expectation of future interest rate hikes: Since people anticipate tighter (more expensive) money tomorrow, they view today´s prices as cheap.
Hmmmm.
A simple country-girl, you know, Macarena does not get it. In her simple world, if inflation were indeed a serious concern, investors would punish the Pound and we would observe currency devaluation, as well as nominal interest-rate increases and a steepening of the yield curve. Her arguments are:
1. The real interest rate reflects economic fundamentals, mostly productivity. Evidence shows that, if anything, various measures of productivity in the UK slightly outpace those observed elsewhere. Real interest rate determinants are thus either constant or slightly to the downside.
2. Nominal interest rates are a monetary (and expectations-related) phenomenon. Monetary conditions, as suggested by the slope of the yield curve (actually, inverted) and by the exchange rate, suggest that monetary conditions are not expansionary. Given the fact that a relatively important current account deficit exists (about 3.5% of GDP), a factor excercising force towards to the weak side, the currency´s behavior perhaps even implies quite the contrary....
3. As mentioned by the Governor in his letter, energy prices have a lot to do with the bad outcome observed in March.
4. Conclusion: Monetary tightening, such a manly thing, is responding to temporary one-time relative price swings. The expectations generated by its almost inevitable course, is indeed the leading cause of the accelerating inflation-strenghtening currency paradox.
Macarena´s view: Down the road, “true” inflation will be revealed as being much more in line with fundamentals, i.e much closer to the 2% goal, and pressure will build to lighten up on monetary policy. In Macarena´s view, and she is a contrarian, monetary authorities should take it easy and stay put, instead of acting virile now, and reversing course later, perhaps even this year.
Number one: inflation has been increasing and now exceeds the comfort limit of 3%, to the point that for the first time since the Old Lady was made independent, the Governor of the Bank of England had to write the dreaded, and legally mandated, “explanation letter” to the Chancellor.
Number two: the British Pound has appreciated beyond the US$2 mark for the first time since 1992, an event terrible, linked to the infamous Black Wednesday affair.
Number three: the conventional wisdom rationalizes this apparent paradox (accelerating inflation + currency appreciation) by invoking the expectation of future interest rate hikes: Since people anticipate tighter (more expensive) money tomorrow, they view today´s prices as cheap.
Hmmmm.
A simple country-girl, you know, Macarena does not get it. In her simple world, if inflation were indeed a serious concern, investors would punish the Pound and we would observe currency devaluation, as well as nominal interest-rate increases and a steepening of the yield curve. Her arguments are:
1. The real interest rate reflects economic fundamentals, mostly productivity. Evidence shows that, if anything, various measures of productivity in the UK slightly outpace those observed elsewhere. Real interest rate determinants are thus either constant or slightly to the downside.
2. Nominal interest rates are a monetary (and expectations-related) phenomenon. Monetary conditions, as suggested by the slope of the yield curve (actually, inverted) and by the exchange rate, suggest that monetary conditions are not expansionary. Given the fact that a relatively important current account deficit exists (about 3.5% of GDP), a factor excercising force towards to the weak side, the currency´s behavior perhaps even implies quite the contrary....
3. As mentioned by the Governor in his letter, energy prices have a lot to do with the bad outcome observed in March.
4. Conclusion: Monetary tightening, such a manly thing, is responding to temporary one-time relative price swings. The expectations generated by its almost inevitable course, is indeed the leading cause of the accelerating inflation-strenghtening currency paradox.
Macarena´s view: Down the road, “true” inflation will be revealed as being much more in line with fundamentals, i.e much closer to the 2% goal, and pressure will build to lighten up on monetary policy. In Macarena´s view, and she is a contrarian, monetary authorities should take it easy and stay put, instead of acting virile now, and reversing course later, perhaps even this year.
Finance Islamique (Update)
A nice story from the Financial Times tells us that:
In what ministers believe will be an important gesture to Britain’s Muslim community, the Treasury will say Monday that it is paving the way for the launch of the first Sharia compliant UK government bonds by 2008.
Macarena is delighted, of course, but thinks that it is also true that the "gesture" will collect a lot of money for the Treasury. This would, in turn, be a nice gesture on the part of the muslim community (and non-muslims, such as Macarena, who simply loves the thrill) towards the (by then) freshly minted Prime Minister. A guy who in his (by then) former position as Chancellor, was among the first to call attention to the potential this new issue will harness. It will be a success. Good for GB, and good for GB.
In what ministers believe will be an important gesture to Britain’s Muslim community, the Treasury will say Monday that it is paving the way for the launch of the first Sharia compliant UK government bonds by 2008.
Macarena is delighted, of course, but thinks that it is also true that the "gesture" will collect a lot of money for the Treasury. This would, in turn, be a nice gesture on the part of the muslim community (and non-muslims, such as Macarena, who simply loves the thrill) towards the (by then) freshly minted Prime Minister. A guy who in his (by then) former position as Chancellor, was among the first to call attention to the potential this new issue will harness. It will be a success. Good for GB, and good for GB.
21.4.07
Virginia Tech Tragedy: Come On!
Some guy shoots dozens of people in unheard-of , unbelievable, cold blood and then, a couple of days later, the victims and their families have to endure this nonsense on the topic of who is guilty?.
The hideputa, as Macarena and her fellow countrymen put it, is guilty, that´s who. Period.
Not his parents, who worked hard to make a life and a build a future for the family (the hideputa included) it in a tough, sometimes brutal, environment.
Not his peers, who have enough already dealing with their own post-adolescent hardships and challenges and their own competitive, law-abiding, decent and hard lives. Guilty by not "embracing" every crazy looking, 20-something loner, writing "aggresive stuff" that abounds in every university campus in every country of the world?. Come on!
Not his teachers, who have to deal with the substantive issue of molding the next generation of bright young adults out of the primitive, rebellious, difficult, aggresive clay of adolescents whom they are handed over for safe-keeping, while at the same time learning more, publishing more, raising families, managing tough competition the world over.
(Macarena wagers that 99.9% of loner, mean-writing, wry students are not assasins and are as talented and as peaceful (deep down) as the 99.9% of non-assasins in the "normal" community. Do you think, say, Tarantino was an all american apple-pie child? Would you suggest we "embrace" such an extremely talented, guy like him, or just let him "do his thing", as americans so wonderfully put it?)
Not the college administrators whose job it is to keep a major university up and running, competing for an ever increasing standing in a global community, making sure 24/7 that an environment made up of tens of thousands of extremely talented, demanding, individuals, works like a clock.
Not the lack of stiff gun legislation, pieces of paper that constitute the horror of many honest law-abiding citizens who want them, and the laughing stock of the true criminals the world-over. Macarena asks herself: do you seriously think that this hideputa, who puts chains on doors so that nobody escapes, lest he miss someone, would have any trouble finding a gun regardless of what the legislation says? Maybe he would have payed a few dollars more, but, Come on!
Bottom line: Macarena is very upset with all this "embracing" nonsense and with what James Lavergne has called the blame game. A Becker-fan type of girl, she thinks the way forward is punishment. She knows full well that the only thing we can punish at this time is this hideputa´s memory, but she still thinks it is useful.
Macarena is no arquitect, but she suggests that this hideputa´s burial site should be a place where we can all vent our profound ire. A place where some other lonely kid, writing or filming extremely violent stuff as we speak, can sense the anger and the outrage every person in the world feels towards his would-be idol. Think about what would happen if this kid, instead, senses a bunch of baffled idiots blaming everyone but the hideputa..
Morever, if there is an excess demand for "embracing", Macarena thinks we should embrace the victims. The world will never know the full extent of what this hideputa really murdered. A path breaking scientific discovery that would have saved millions of lives? A major work of art? A new way to use technology and cure poverty?. We will never know, but the victims surely fit the profile of the best and the brightest. And this is what we should embrace, because the hideputa has also murdered a piece of all of our futures.
The hideputa, as Macarena and her fellow countrymen put it, is guilty, that´s who. Period.
Not his parents, who worked hard to make a life and a build a future for the family (the hideputa included) it in a tough, sometimes brutal, environment.
Not his peers, who have enough already dealing with their own post-adolescent hardships and challenges and their own competitive, law-abiding, decent and hard lives. Guilty by not "embracing" every crazy looking, 20-something loner, writing "aggresive stuff" that abounds in every university campus in every country of the world?. Come on!
Not his teachers, who have to deal with the substantive issue of molding the next generation of bright young adults out of the primitive, rebellious, difficult, aggresive clay of adolescents whom they are handed over for safe-keeping, while at the same time learning more, publishing more, raising families, managing tough competition the world over.
(Macarena wagers that 99.9% of loner, mean-writing, wry students are not assasins and are as talented and as peaceful (deep down) as the 99.9% of non-assasins in the "normal" community. Do you think, say, Tarantino was an all american apple-pie child? Would you suggest we "embrace" such an extremely talented, guy like him, or just let him "do his thing", as americans so wonderfully put it?)
Not the college administrators whose job it is to keep a major university up and running, competing for an ever increasing standing in a global community, making sure 24/7 that an environment made up of tens of thousands of extremely talented, demanding, individuals, works like a clock.
Not the lack of stiff gun legislation, pieces of paper that constitute the horror of many honest law-abiding citizens who want them, and the laughing stock of the true criminals the world-over. Macarena asks herself: do you seriously think that this hideputa, who puts chains on doors so that nobody escapes, lest he miss someone, would have any trouble finding a gun regardless of what the legislation says? Maybe he would have payed a few dollars more, but, Come on!
Bottom line: Macarena is very upset with all this "embracing" nonsense and with what James Lavergne has called the blame game. A Becker-fan type of girl, she thinks the way forward is punishment. She knows full well that the only thing we can punish at this time is this hideputa´s memory, but she still thinks it is useful.
Macarena is no arquitect, but she suggests that this hideputa´s burial site should be a place where we can all vent our profound ire. A place where some other lonely kid, writing or filming extremely violent stuff as we speak, can sense the anger and the outrage every person in the world feels towards his would-be idol. Think about what would happen if this kid, instead, senses a bunch of baffled idiots blaming everyone but the hideputa..
Morever, if there is an excess demand for "embracing", Macarena thinks we should embrace the victims. The world will never know the full extent of what this hideputa really murdered. A path breaking scientific discovery that would have saved millions of lives? A major work of art? A new way to use technology and cure poverty?. We will never know, but the victims surely fit the profile of the best and the brightest. And this is what we should embrace, because the hideputa has also murdered a piece of all of our futures.
So Sorry
With this euro apreciation thing, Macarena has been simply too busy indulging, so her posting has suffered lately. She is so sorry.
In fact, while she was in New York, as part of her Currency Appreciation Holiday, she was identified as a British citizen . Outrageous.
In fact, while she was in New York, as part of her Currency Appreciation Holiday, she was identified as a British citizen . Outrageous.
2.4.07
Foucault and his Bla-Blas meet Germany
The conventional wisdom regarding the Eurozone economy runs something like the conventional wisdom regarding all things in the 50-and-over category. Muscles and nerves do begin to suffer the all too notorious signs of age.
The specifics upon which the CW rests: In Europe the obstinate rigidity of vested interests imposes itself insurmountable as a barrier to progress. Her costly welfare-state, high labor costs, sky-high tax-rates and monstrous bureaucratic red tape, seriously affect her ability to face two specific challenges: those derived from a rapidly aging population and those derived from globalization.
This is all quite true, but Macarena finds the endless digression on the part of the structurally pessimistic and the chic-skeptics quite boring and extremely pointless. They have said nothing new in years and have not been able to convince anybody to actually go ahead and…… do it, as Michael Jordan used to say.
At a younger age, she used to feel the same way about this now-prehistoric band of guys ---Foucault and his bla-blas--- whom she was inhumanely forced into reading.
Anyway, rather than insist on the largely-obvious, it seem interesting to reflect about one very significant caveat that is in order. Let us run through a few facts.
First, wage restraint has been a very important part of the recent German story, and by “recent” I don’t mean a year or two, but a decade or so. In cumulative terms, relative (nominal) wages in the rest of the Eurozone have increased by 8.5% with respect to Germany, while relative consumer prices have increased by about 6%.
Secondly, and this not surprising, since 1999, Germany’s exports, measured in terms of volume, have increased by more than 50%. The runner-up in Europe, Macarena is happy to say, is Spain where the increase is under 30%.
Thirdly, Germany outperformed the region in 2006 and any reasonable assessment must attribute much of this to productivity gains. After all, everybody did experience the same global cycle, eh?. 2007, on the other hand, has begun quite well, thank you very much. The Federal Statistics Office estimated Q4 growth at 3.7%, led by a continued surge in investment, while unemployment continued to fall in 07QI.
Fourth, perhaps more importantly, Germany is in the midst of the most interesting and dynamic economic reform debate in any advanced economy. A tax package that includes a significant 3-point increase in the VAT (from 16% to 19%), is in place since January, and the cabinet has given the go-ahead for a significant reduction in the corporate tax, from 38.5% to under 30%, expectations are that it will clear the Congress by July.
Of course, one must bear in mind a thing or two.
A thing: Hourly labor costs, at around €30, are still among the highest in the world and generate what Hans Werner Sinn has interestingly termed “Bazaar Economy” effect: value added by the booming export sector is rising by less than exports as a whole, as value-generating jobs all along the productive process that ultimately lead to an export item are outsourced to countries like Poland, where hourly labor costs are €5 instead of €30. There is little doubt that failing to push forward the de-facto labor reform taking place during the last decade, let alone reversing it, would be a terrible blow.
Likewise, the corporate tax reform still has to undergo congressional debate and observers, interested in the likely effect on future investment, must keep an eye on the outcome regarding the effective marginal corporate rate, rather than the headline-grabbing nominal rate. The elimination of interest-payment deductions not only compensates the favorable competitiveness effect of the rate reduction, but can also distort investment-financing decisions in dangerous ways.
Bottom line: Europe has been deservedly criticized for her economic complacency and rigidity, a troubling burden to carry when you have a lot of debt, when you are aging, and when you are part of an increasingly integrated world.
Germany has, for the last ten years, and increasingly so, lived a reform process, notably in the labor market but also in other areas, which gives ample reason to conclude that, even at 50, and despite the aches, the pains, and the delayed gratification, it is not too late for anything. Rather than mock the still-prominent tummy of a determined and disciplined middle-ager, who began to work out at 40, we should be figuring out ways to convince the truly sclerotic to throw out all the Foucault bla-bla band-type nonsense, get out there, and…… do the same.
The specifics upon which the CW rests: In Europe the obstinate rigidity of vested interests imposes itself insurmountable as a barrier to progress. Her costly welfare-state, high labor costs, sky-high tax-rates and monstrous bureaucratic red tape, seriously affect her ability to face two specific challenges: those derived from a rapidly aging population and those derived from globalization.
This is all quite true, but Macarena finds the endless digression on the part of the structurally pessimistic and the chic-skeptics quite boring and extremely pointless. They have said nothing new in years and have not been able to convince anybody to actually go ahead and…… do it, as Michael Jordan used to say.
At a younger age, she used to feel the same way about this now-prehistoric band of guys ---Foucault and his bla-blas--- whom she was inhumanely forced into reading.
Anyway, rather than insist on the largely-obvious, it seem interesting to reflect about one very significant caveat that is in order. Let us run through a few facts.
First, wage restraint has been a very important part of the recent German story, and by “recent” I don’t mean a year or two, but a decade or so. In cumulative terms, relative (nominal) wages in the rest of the Eurozone have increased by 8.5% with respect to Germany, while relative consumer prices have increased by about 6%.
Secondly, and this not surprising, since 1999, Germany’s exports, measured in terms of volume, have increased by more than 50%. The runner-up in Europe, Macarena is happy to say, is Spain where the increase is under 30%.
Thirdly, Germany outperformed the region in 2006 and any reasonable assessment must attribute much of this to productivity gains. After all, everybody did experience the same global cycle, eh?. 2007, on the other hand, has begun quite well, thank you very much. The Federal Statistics Office estimated Q4 growth at 3.7%, led by a continued surge in investment, while unemployment continued to fall in 07QI.
Fourth, perhaps more importantly, Germany is in the midst of the most interesting and dynamic economic reform debate in any advanced economy. A tax package that includes a significant 3-point increase in the VAT (from 16% to 19%), is in place since January, and the cabinet has given the go-ahead for a significant reduction in the corporate tax, from 38.5% to under 30%, expectations are that it will clear the Congress by July.
Of course, one must bear in mind a thing or two.
A thing: Hourly labor costs, at around €30, are still among the highest in the world and generate what Hans Werner Sinn has interestingly termed “Bazaar Economy” effect: value added by the booming export sector is rising by less than exports as a whole, as value-generating jobs all along the productive process that ultimately lead to an export item are outsourced to countries like Poland, where hourly labor costs are €5 instead of €30. There is little doubt that failing to push forward the de-facto labor reform taking place during the last decade, let alone reversing it, would be a terrible blow.
Likewise, the corporate tax reform still has to undergo congressional debate and observers, interested in the likely effect on future investment, must keep an eye on the outcome regarding the effective marginal corporate rate, rather than the headline-grabbing nominal rate. The elimination of interest-payment deductions not only compensates the favorable competitiveness effect of the rate reduction, but can also distort investment-financing decisions in dangerous ways.
Bottom line: Europe has been deservedly criticized for her economic complacency and rigidity, a troubling burden to carry when you have a lot of debt, when you are aging, and when you are part of an increasingly integrated world.
Germany has, for the last ten years, and increasingly so, lived a reform process, notably in the labor market but also in other areas, which gives ample reason to conclude that, even at 50, and despite the aches, the pains, and the delayed gratification, it is not too late for anything. Rather than mock the still-prominent tummy of a determined and disciplined middle-ager, who began to work out at 40, we should be figuring out ways to convince the truly sclerotic to throw out all the Foucault bla-bla band-type nonsense, get out there, and…… do the same.
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